Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/154086
Authors: 
Schmidt, Sebastian
Year of Publication: 
2014
Series/Report no.: 
ECB Working Paper 1653
Abstract: 
I show that the zero nominal interest rate bound may render it desirable for society to appoint a fiscally activist policy-maker who cares less about the stabilisation of government spending relative to inflation and output gap stabilisation than the private sector does. I work with a simple New Keynesian model where the government has to decide each period afresh about the optimal level of public consumption and the one period nominal interest rate. A fiscally activist policy-maker uses government spending more aggressively to stabilise inflation and the output gap in a liquidity trap than an authority with preferences identical to those of society as a whole would do. The appointment of an activist policy-maker corrects for discretionary authorities’ disregard of the expectations channel, thereby reducing the welfare costs associated with zero bound events.
Subjects: 
discretion
fiscal policy
monetary policy
zero nominal interest rate bound
JEL: 
E52
E62
E63
Document Type: 
Working Paper

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